Practical Impact and Longer Term Consequences of Citizens United v. FEC

January 25, 2010, Caplin & Drysdale Political Law Alert: Important Recent Developments

In an historic Constitutional development, a divided Supreme Court last Thursday invalidated the decades-old federal prohibition against independent expenditures by corporations in federal political campaigns, holding that corporations have the same First Amendment speech rights as individuals. This decision overrules portions of the Court's 2003 opinion in McConnell v. FEC, in which the Court previously upheld McCain-Feingold provisions regulating political advertising by corporations and unions. The immediate practical impact of the 5-4 decision in Citizens United is that both non-profit and for-profit corporations can now fund independent public communications expressly advocating the election or defeat of political candidates.

By a broader 8-1 margin, however, the Citizens United Court also upheld the disclosure obligations attached to such ads, meaning that the resulting ads themselves will still need to carry a disclaimer identifying the entity responsible for them, and broader disclosures will still need to be filed with the Federal Election Commission by the person or legal entity making the communication listing anyone who gave money to the filer for the purpose of paying for such ads.[1] Further, the Court's majority opinion utilized a broad definition of "electioneering communication" to conclude that the movie at issue was regulated by the statute even though it was to be distributed via video-on-demand. This determination confirms that disclosures must be filed for a broader swath of paid communications than some might have thought prior to this decision. The Court also noted that disclosure might not be required where it would place the speaker in actual personal danger.

The decision does not address the legal prohibition against corporate contributions to candidates, meaning that corporations and labor unions must still undertake their federal campaign contribution activity solely through connected political action committees, and must use only funds voluntarily contributed to those committees by corporate executives and shareholders (or, for labor unions, by members) to make contributions to candidates. It also does not address how this new First Amendment right for corporations will apply to numerous state and local statutes that more narrowly restrict political spending by particular classes of corporations (regulated utilities, government contractors, etc).

Some of the lawyers who represented Citizens United have already signaled that they will bring a follow-on suit challenging the remaining prohibition on contributing corporate funds directly to candidates. Since the Court found no difference between the speech rights of corporations and of individuals, this new suit likely will request that corporations be allowed to make contributions in the same amounts as individuals. The government likely will argue in response that under Buckley v. Valeo regulation of contributions is subject to a different and more lenient standard of review than regulation of expenditures, that many corporations control their own connected PACs, and that allowing corporations to make direct contributions will provide opportunities for corporate owners and managers to evade individual contribution limits. If a business owner can contribute through each of a string of subsidiary corporations, for example, alongside his or her personal contribution, the per donor limit on contributions to candidates will be effectively mooted. This is likely to be the next major case initiated in the wake of Citizens United.

Contribution/Expenditure Distinction in Public Communications

There are numerous thorny legal issues that are raised by this decision, and like all landmark cases the full effect will only be clear after other cases have explored areas left unresolved by this one. For the last eight years, the courts and the Federal Election Commission have been struggling to settle on a legally sufficient definition for an "independent expenditure" rather than a "coordinated" one - in other words, those activities and factual predicates which turn an otherwise "independent" corporate expenditure for or against a federal candidate into an "in-kind" corporate contribution to the benefiting candidate. Since independent expenditures by corporations or labor unions are now permissible under Citizens United, but in-kind contributions from those entities are not, the rules on coordination have taken on singular importance for groups funding advertising campaigns about candidates or elected officials. Issues to be resolved include whether any discussion between candidates and corporations about the election and/or a public communication can ever occur if a communication is to be considered "independent" (,and if so what and when), and the use of common vendors. The bad news is that the FEC has not yet finalized a definition of coordinated expenditures, despite these eight years of effort and several court decisions on the subject.

To define coordination for these purposes, the FEC has promulgated a multi-factor test that considers the content of the communication and the conduct of the advertisers, candidates, and/or party committees involved. In many circumstances, like the coordination of express advocacy, the application of the FEC's standards is non-controversial – and in fact, in some regards the Court's opinion in Citizens United may serve to strengthen those applications. All five justices in the majority, without objection from those who dissented, concluded that "Hillary: The Movie" constitutes the functional equivalent of express advocacy, a conclusion that was not obvious under the Court's prior interpretations. Consequently, this part of the Citizens United majority opinion may serve to clarify that content like "Hillary: The Movie" is among the range of communications which the FEC can consider to be in-kind contributions.

Nevertheless, the outer boundaries of the types of communications beyond express advocacy that can be treated as in-kind contributions have been hotly litigated between the FEC and the Congressional sponsors of McCain-Feingold. The current state of play in that litigation is that the FEC is currently undertaking a rulemaking to reconsider which types of content beyond express advocacy, and which types of conduct besides outright agreements, requests, or substantive discussions about particular ads, can constitute coordination. Ironically, the comment period on the FEC's currently-proposed regulations closed the day before the decision in Citizens United was released, but given the breadth of this decision the FEC may consider re-opening the comment period to solicit additional perspectives.

Contribution/Expenditure Distinction in Corporate Fundraising

Even aside from the definition of "coordination" in the advertising context, the breadth of the Court's decision on such a fundamental building block of the nation's campaign finance laws presents other vexing challenges for the FEC. Not least among these is the degree to which the Commission's regulations governing corporate fundraising for federal candidates and party committees are premised on the corporate expenditure prohibition that the Supreme Court just overturned.

Specifically, the FEC has for many years prohibited corporate "facilitation" of individual contributions to candidates. These limitations prevent corporate executives from using their staff employees and physical assets like telephones, photocopiers, and computer services to help raise federal campaign contributions in any ways which increase the cost or overhead expenses to the corporation. Similarly, even use of capital assets like computers or telephones in ways which incur no increased costs to the company is restricted to "incidental use," typically less than an hour per week or four hours per month.

If such fundraising activity is undertaken as an agent of the recipients – as much of it is – those limits and prohibitions on corporate facilitation clearly still apply. However, not all such fundraising is so closely controlled or coordinated with the ultimate recipients of the contributions, and furthermore it is not obvious under remaining law how to tell which is and which isn't. As noted above, the FEC has extensive regulations on coordinated communications to the general public, but the kind of corporate fundraising at issue in these regulations is typically aimed at close friends, colleagues, customers and vendors of the executives, and not to the general public at large. Similarly, there are no advisory opinions or even enforcement actions which look closely into whether facilitation violations are based on a contribution or expenditure analysis, since prior to Citizens United the distinction was irrelevant in this context.

Finally, the statute provides that the cost of any solicitation undertaken "in concert or cooperation with or at the request or suggestion of" a candidate or party committee would be a contribution, but it also isn't obvious how far back into corporate operations that restriction would extend. For example, does that provision only cover the actual solicitations, or does it still prohibit corporate staff from helping with the administrative and logistical sides of raising money while "on the clock" of the corporation?

These are all only illustrations of the range of difficult questions opened by Citizens United, and it will fall to the FEC in the first instance to come up with answers for them. The result could be a new minefield for corporations that wish to aggressively engage in fundraising activities for federal candidates, at least for the moment. All corporate fundraising activities permitted under the old rules will still be completely legal, but determining which additional ones will now be permissible will require careful case by case analysis.

Other Issues: Tax Consequences and Bans on Expenditures by National Banks

Any corporate funder of ads under this new constitutional regime should take care to understand the tax consequences of their independent expenditures. Political advocacy and lobbying expenses are not deductible as business expenses under IRS rules. Accordingly, any new spending which occurs as a result of this decision will be done with non-deductible funds.

Finally, the breadth of the language in the majority opinion suggests that potential future challenges to other similar expenditure prohibitions may also succeed. Federal law currently prohibits national banks from making independent expenditures, but the validity of that ban is unclear under the language of the Supreme Court's holding. The majority opinion concludes with the holding that "[t]he judgment of the District Court is reversed with respect to the constitutionality of 2 U.S.C. §441b's restrictions on corporate independent expenditures." Slip op. at 57. Given that the national bank expenditure prohibition is part of 2 U.S.C. §441b, a strict reading of this holding would suggest that banks are now as free as other corporations to make independent expenditures. However, the special characteristics of banks created under acts of Congress could support arguments that national banks are closer akin to government-sponsored enterprises like Fannie Mae or even the Export-Import Bank, and thus should be left subject to broader controls on their political activities to avoid having government agencies themselves take sides in elections to government office.

Election-Related Spending by Foreign Nationals or U.S. Corporations with International Owners

Another area of interest is the possible effect of this decision on foreign political spending in U.S. elections. It is important to note (as much public comment on this decision does not) that under current law, election spending by non-U.S. persons and entities is prohibited under section 441e of the statute, and that prohibition is unaffected by the ruling in Citizens United. Thus, the existing restriction on expenditures by foreign corporations remains in place not because they are corporations but because they are foreign. Further, the U.S. subsidiaries of international companies are already subject to FEC restrictions on spending non-U.S. funds in U.S. elections, or allowing foreign nationals a role in the decision-making process. 11 C.F.R. § 110.20.

However, the importance the majority places on the First Amendment's protection of "speech" regardless of the identity of the "speakers" suggests a strong argument could be made that the prohibition on campaign expenditures by foreign nationals could be vulnerable to challenge in a future case. Such a result may not rest easily with Congress or the public, however, to the extent that kind of First Amendment absolutism would allow campaign expenditures to be made by foreign governments or even foreign heads of state.

Possible Legislative Responses

Finally, there has been considerable speculation that the Congressional leadership will propose legislation to regulate corporate political expenditures to the extent this decision leaves room to do so. President Obama has urged them to do so. Reports have focused on possible new disclosure requirements, shareholder approval mechanisms, and limits because of potentially corrupting connections with Congress (applying different treatment to corporations with lobbyists, for example, or to government contractors). At this early stage, it is too soon to know whether such measures will have sufficient support in Congress, or could withstand Supreme Court review under the standards established in Citizens United. Similarly, Justice Stevens' dissent suggests that states could condition their corporate charters on additional disclosure or shareholder rights requirements. We will continue to follow these developments closely and will provide further updates as the laws governing these issues continue to evolve.

[1] These disclosures also name the custodian of records for the entity running the ads, along with other information such as a list of the people who exercise or share control over that entity and an itemization of the disbursements paid to create and distribute the ad. These reports must be filed as soon as 24 hours after the ad is first distributed, depending on how soon the ads run before an election and how much money the reports will disclose.

Please contact Caplin & Drysdale's political activity law practice if you have any questions.

About Caplin & Drysdale Caplin & Drysdale's Political Activity Law Group is a bipartisan practice, representing major corporate, tax-exempt and political clients. The group advises clients on regulated political activities, lobbying, and government ethics laws. The firm also maintains practices in the fields of international tax, tax controversy and fraud, tax-exempt organizations, creditors' rights and complex financial litigation, and white collar defense.

This alert is intended as a summary of legal issues for your general information. It does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose.